HG 

1867 

Y84c 


A 

^^—  — 

Ai 

^=^  tn 

—  o 

0  m 

^^—  — i 

o  m 

— ——   rn 

0  ■ 

=  — 

=  I  1  1 

5  B 

—  n 

5  m 

9^ 

55 

n 

5  = 

=  > 

8  = 

> 

3l 

S^  1 — 

— 1 

^^  -< 

JANKERS     HANDY     SERIES  — III 


CREDIT  CURRENCY 

BY 

ELMER  H.  VeUNGMAN 

Editor  BACKERS  MAGAZINE 


-ll 


BANKERS    PUBLISHING    CO.,    NE^'    YORK 


0 


r 


\j~jl,  UoJa^j 


BANKERS  HANDY  SERIES 

III. 


"No  currency  can  meet  the 
wants  of  this  country  that  is 
not  founded  on  business." 

JAMES  A.  GARFIELD. 


CREDIT 

CURRENCY 

By 

ELMER 

H.   YOUNGMAN 

Editor  Bankers  Magazine 

New  York 

BANKERS   PUBLISHING    COMPANY 

1907 

Copyright,   1907,  Bankers  Publishing  Co. 


■  > 
•  » 
• «  • 


,  < 

iii     i 


I8G>7 
Y$4 


CREDIT  CURRENCY. 

DEFINITION. 


r  |  ^HE  term  "credit  currency/'  as  herein  used, 
JL  does  not  refer  to  paper  money  issued  by 
the  Government,  but  applies  to  notes  is- 
sued by  banks  on  their  general  credit  without  a 
pledge  of  bonds  or  other  special  security,  depos- 
ited with  a  trustee,  to  provide  for  the  payment 
of  the  notes  in  case  of  failure  of  the  issuing 

bank. 

SECURITY. 

A  credit  currency,  as  above  denned,  would  be 
thus  secured: 

(1)  By  a  coin  reserve. 

(2)  By  the  general  assets  and  credit  of  the 
issuing  bank. 

(3)  By  a  redemption  fund  deposited  with  the 
United  States  Treasury. 

5 


389200 


CREDIT  CURRENCY 


(4)  By  a  safety  fund  contributed  by  all  of 
the  issuing  banks. 

(5)  By  bills  of  exchange,  representing  com- 
modities on  their  way  from  the  producer  to  the 
consumer,  and  by  commercial  paper,  represent- 
ing the  notes  of  borrowers,  exchanged  for  the 
bank's  notes. 

These  safeguards,  while  absolute,  may  be  sup- 
plemented by  a  provision  (as  in  Canada)  that 
notes  of  a  failed  bank  shall  bear  interest,  thus 
making  the  note  of  a  suspended  bank  even  more 
valuable  than  while  the  bank  is  a  going  concern. 

■ 

SAFETY. 

The  methods  of  securing  a  credit  currency  as- 
sure perfect  safety.  By  requiring  the  banks 
jointly  to  guarantee  each  other's  notes,  by  con- 
tributions to  a  safety  fund,  loss  to  noteholders 

6 


CREDIT  CURRENCY 


is  made  impossible.  The  Government  could 
well  afford  to  insure  the  payment  of  notes — 
though  this  would  not  be  necessary. 

WHAT  A  CREDIT  NOTE   IS,  AND  HOW 

ISSUED. 

A  credit  note  is  an  obligation  of  the  bank  is- 
suing it,  to  pay  a  specified  sum  of  money  to  the 
bearer,  on  demand.  So  far  as  the  bank  is  con- 
cerned it  is  practically  the  same  as  a  credit 
given  to  a  depositor  in  his  bank  book,  and 
whether  this  credit  be  in  the  form  of  a  book 
entry  to  the  depositor's  credit,  against  which  he 
may  draw  checks,  or  in  the  form  of  a  bank  note, 
makes  but  little  difference  to  the  bank.  The 
check  will,  however,  be  presented  for  payment 
sooner  than  the  note,  as  shown  by  experience. 

The  credit  currency  would  be  issued  to  the 
banks  in  the  same  manner  as  the  existing  nation- 


CREDIT  CURRENCY 

al  bank  notes,  no  change  being  contemplated  in 
the  method  of  printing  and  supervising  the  note 
issues.  The  deposit  of  bonds  or  other  special 
security  (except  a  redemption  fund)  would  not 
be  required  as  a  preliminary  to  the  right  to  is- 
sue notes. 

INFLATION  IMPOSSIBLE. 

If  the  notes  are  redeemable  In  gold  on  de- 
mand at  the  bank's  counters,  and  at  the  offices 
of  one  or  more  redemption  agents  at  New  York 
and  other  convenient  centers,  there  can  be  no 
inflation.  Every  bank  seeking  to  get  its  own 
notes  out  will  seek  just  as  diligently  to  retire 
the  notes  of  its  rivals.  The  notes  will  also  be 
retired  owing  to  the  desire  of  a  bank  receiving 
them  to  exchange  them  as  speedily  as  possible 
for  some  form   of  money  that  will  answer  for 

8 


CREDIT  CURRENCY 


reserve  purposes.  The  notes  will  also  be  re- 
tired from  circulation  by  being  deposited  with 
the  issuing  banks,  which  can  not  reissue  them 
until  a  fresh  business  transaction  brings  to  the 
bank  some  form  of  commercial  paper  to  be  ex- 
changed for  the  notes.  The  amount  of  notes 
issued  will  be  determined  by  the  convenience  of 
the  public,  not  by  the  banks. 

The  process  of  redeeming  a  credit  currency  is 
precisely  the  same  as  that  employed  with  checks. 
A  bank  in  one  town  receiving  the  notes  of  an- 
other bank  in  the  same  town  will  send  them  to 
the  clearing-house,  with  its  other  items,  for  pay- 
ment. If  the  notes  are  issued  by  banks  in  other 
towns,  or  if  there  is  no  clearing-house  in  the 
town  where  the  receiving  bank  is  located,  then 
the  notes  will  all  be  sent  to  the  nearest  redemp- 
tion agency  for  payment. 


CREDIT  CURRENCY 


ADVANTAGES  OF  A  CREDIT  CUR- 
RENCY. 

Economy. — The  use  of  credit  bank  notes  sets 
free  an  equal  amount  of  coin,  less  the  amount 
of  the  latter  required  to  be  held  as  a  reserve 
against  the  notes.  Gold  coin  and  gold  certifi- 
cates constitute  a  costly  form  of  circulating  me- 
dium. They  represent  an  unnecessary  locking 
up  of  capital  for  ends  that  might  be  attained 
with  less  expense  and  equal  safety.  Experience, 
in  this  country,  in  Canada  and  elsewhere,  has 
shown  that  under  a  proper  system  of  issue  and 
redemption  bank  notes  may  safely  be  issued 
against  a  reserve  of  coin  much  smaller  than  the 
100  per  cent,  required  against  coin  certificates. 
A  reserve  of  twenty-five  per  cent,  would  per- 
haps be  adequate.  The  use  of  reserve  money  for 
purposes  of  hand-to-hand  circulation  takes  that 

10 


CREDIT  CURRENCY 


much  actual  monev  out  of  the  banks,  and  di- 
minishes  their  lending  powers  not  only  to  the 
amount  of  money  so  lost,  but  in  a  multiplied 
ratio,  inasmuch  as  they  are  permitted  to  lend — 
in  the  shape  of  deposit  credits — several  times 
the  sum  of  the  reserves  held. 

A  nation  that  needlessly  locks  up  its  capital 
in  an  expensive  form  of  currency  handicaps  it- 
self economically,  and  is  at  a  further  disad- 
vantage in  being  unable  to  increase  its  currency 
to  meet  sudden  and  unforeseen  demands  with- 
out waiting  for  the  increase  in  the  metallic  stock 
through  the  slow  process  of  mining  or  until  a 
favorable  exchange  rate  will  permit  gold  to  be 
brought  in  from  abroad. 

The  loss  by  abrasion — a  considerable  factor 
where  gold  coin  is  used  as  a  circulating  medium 
— may  be  obviated  by  the  use  of  bank  notes; 
the  cost  of  transporting  the  latter  from  place 

11 


CREDIT  CURRENCY 


to  place  is  also  less  than  for  an  equal  amount 
of  coin. 

Adaptation  to  Business  Needs. — The  chief 
characteristic  of  a  credit  currency  lies  in  its 
adaptability  to  business  needs.  Being  based 
upon  business,  its  volume  varies  with  the  changes 
in  the  activities  of  production  and  trade.  No 
question  arises  as  to  whether  there  is  too  little 
or  too  much  currency — the  demand  arising  out 
of  business  transactions,  and  rising  or  falling 
with  the  rise  and  fall  of  those  transactions,  and 
the  supply  being  limited  only  by  the  want  and 
convenience  of  the  public  and  by  the  coin  re- 
serve which  the  banks  must  hold  against  their 
notes ;  in  other  words,  by  their  ability  to  provide 
the  means  for  paying  their  note  obligations. 
The  provision  of  a  coin  reserve  constitutes  an 
effective  check  upon  inflation. 

12 


CREDIT  CURRENCY 


This  adaptability  of  a  credit  currency  to  busi- 
ness needs  is  of  the  highest  importance  in  a 
country  like  the  United  States,  where  the  de- 
mands for  currency  fluctuate  so  widely  at  dif- 
ferent seasons  of  the  year.  In  the  summer  and 
fall,  especially,  the  harvesting  and  marketing 
of  the  crops  call  for  additional  supplies  of  cash. 
Were  the  banks  permitted  to  issue  credit  cur- 
rency, they  could  meet  this  demand  without  in- 
convenience. At  present  the  banks  in  the  local- 
ities where  such  demands  arise  are  compelled  to 
call  on  their  city  correspondents  to  ship  cash, 
and  this  can  be  accomplished  only  by  a  large 
reduction  of  loans  by  the  city  banks,  resulting 
in  a  disturbance  at  the  money  centers  which  re- 
acts upon  the  entire  country. 

Were  the  city  banks  permitted  to  issue  a  credit 
currency  in  the  form  of  their  circulating  notes, 
they  could  meet  this  demand,  to  a  large  extent, 


13 


CREDIT  CURRENCY 


by  sending  these  notes  in  lieu  of  actual  money, 
thus  avoiding  the  necessity  of  greatly  reducing 
their  own  loans.  In  other  words,  the  book  credit 
on  the  books  of  the  city  bank,  representing  the 
deposit  of  its  out-of-town  correspondent,  would 
be  converted  into  a  bank-note  credit.  When  the 
bank  notes  had  completed  their  work  they  would 
be  retired,  either  through  redemption  and  can- 
cellation, or  they  would  return  to  the  issuing 
banks  again  in  the  shape  of  deposits. 

In  Canada,  with  a  bank  credit  currency,  this 
seasonal  scramble  for  cash  is  unknown.  The 
extraordinary  demands  are  met  by  an  increased 
issue  of  bank  notes;  and  as  the  demand  sub- 
sides to  the  normal,  the  increased  issues  are 
gradually  retired.  The  volume  of  notes  rises  as 
business  transactions  increase,  and  falls  with  its 
decline — the  notes  not  creating  the  business,  but 
the  business  bringing  the  notes  into  being. 

14 


CREDIT  CURRENCY 


This  exceptional  demand  for  currency  may 
arise  in  a  number  of  ways.  That  most  familiar 
in  the  United  States  is  this:  the  farmer  needs 
cash  to  pay  his  harvest  hands,  and  the  grain 
buyer  needs  cash  to  pay  the  farmer  for  his 
grain.  Bank  checks  can  not  supply  this  need; 
since  they  are  not  usually  of  convenient  denom- 
inations, nor  can  the  receivers  of  them  use  them 
freely  as  cash.  Bank  credit  notes  meet  the  re- 
quirements perfectly.  Though  in  principle  they 
differ  but  little  from  a  check  (particularly  if  the 
latter  be  certified),  they  have  these  manifest  ad- 
vantages over  a  check — they  are  issued  in  con- 
venient denominations,  and  they  will  circulate 
precisely  the  same  as  money. 

Credit  currency  in  the  form  of  bank  notes 
is  most  useful  in  sparsely  settled  communities, 
where  checks  do  not  find  ready  acceptance.  In 
the  larger  centers  checks  may  be  used  quite  as 

15 


CREDIT  CURRENCY 


conveniently  as  coin  or  notes,  and  in  fact  are 
so  employed  to  an  overwhelming  extent. 

Were  the  banks  permitted  to  issue  a  credit  cur- 
rency, a  customer  of  a  bank  having  a  draft  drawn 
against  a  shipment  of  goods  would  take  it  to 
his  bank,  discount  it  and  get  the  proceeds  placed 
to  his  credit,  against  which  he  could  draw  a  num- 
ber of  checks  with  which  to  pay  his  bills  if  they 
were  due  to  large  dealers  having  bank  accounts, 
or  he  could  draw  a  single  check  and  get  the 
bank's  notes,  if  he  wished  to  pay  farm  hands, 
factory  operatives,  or  to  buy  grain  or  other 
produce.  Or  the  customer  could  use  his  own 
note  instead  of  the  draft,  and  in  the  same  way. 

This  adaptability  of  a  credit  currency  to  the 
needs  of  sparsely  settled  communities  was  ad- 
mirably stated  by  Hon.  Lyman  J.  Gage,  former 
Secretary  of  the  Treasury,  in  an  address  be- 
fore the   New  York   Chapter  of  the  American 


16 


CREDIT  CURRENCY 


Institute  of  Bank  Clerks  on  November  6,  1902. 
Mr.  Gage  said: 

"Now,  I  come  to  another  point  in  my  talk, 
which  relates  to  a  device  of  credit,  which  used 
to  exist,  and  in  other  countries  does  now  exist, 
but  which  has  been  destroyed  with  us,  much  to 
the  harm,  in  my  opinion,  of  the  general  body 
politic.  There  is  no  difficulty  now  in  going  to 
the  bank  and  obtaining  a  credit  on  its  books  in 
exchange  for  a  good  note,  the  proceeds  to  be 
checked  against  in  the  ordinary  way;  that  is  to 
say,  to  acquire  the  right  to  draw  checks  on  the 
bank  for  cash;  there  is,  I  say,  no  difficulty  in 
doing  this,  provided  the  bank  has  a  little  more 
than  its  legal  reserve  on  hand. 

"But  there  are  uses  of  life  for  which,  if 
credit  is  to  be  utilized  so  as  to  cover  these  uses, 
some  device  of  credit  must  exist  other  than  bank 

17 


CREDIT  CURRENCY 


books,  checks  and  drafts.  Checks  will  not  pay 
cotton-pickers  in  the  Southern  cotton  fields. 
There  is  no  place  for  the  cotton-picker  to  go 
and  realize  the  money  on  them;  and  it  is  money, 
or  what  will  circulate  as  money,  that  he  wants. 
Checks  will  not  pay  the  lumbermen  in  the  North- 
ern woods;  they  will  not  pay  the  lumberman  in 
the  pineries  of  Oregon  or  Washington,  nor  the 
salmon  fisherman  in  Alaska,  nor  the  coal  miners 
of  Pennsylvania,  Kentucky  or  Indiana,  nor  the 
great  army  of  harvesting  hands  that  gather  the 
grain  in  the  Far  West.  No;  but  are  not  these 
needs  of  life  as  worthy  the  facilities  of  credit 
from  the  bank  as  are  the  needs  of  the  Wall 
Street  operators,  or  the  dealer  around  Sixth  Ave- 
nue, Twenty-third  Street,  Thirty-fourth  Street, 
or  any  other  street?  Certainly  they  are,  for 
these  uses  to  which  I  have  referred  lie  at  the 
very  foundation  of  our  prosperity. 

18 


CREDIT  CURRENCY 
Eaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaa 


"I  have  pictured  to  myself,  as  illustrating 
this  particular  point,  a  man  going  to  a  bank — 
three  of  them — one  saying:  'I  want  to  borrow 
$10,000,  Mr.  Banker.'  'Yes.  What  do  you 
want  to  do  with  it?'  'I  want  you  to  pass  it  to 
my  credit.  I  shall  be  checking  against  it  in  the 
course  of  my  business.'  The  banker  says  to 
himself,  'I  have  a  little  surplus  over  the  legal  re- 
serve. I  will  take  my  chance  with  him.'  'All 
right.'  The  banker  thus  adds  to  his  liabilities 
$10,000  by  crediting  the  borrower  with  the 
amount  of  the  loan.  Number  two  comes  along. 
He  makes  the  same  request.  He  is  treated  in 
the  same  way.  Number  three  comes  along  and 
says,  'I  would  like  $10,000,  Mr.  Banker.  I 
see  you  have  accommodated  my  two  friends.  I 
hope  I  am  not  too  late.'  'What  do  you  want  to 
do  with  the  money?'  'I  am  establishing  a  num- 
ber  of   stations    down   Pamlico   Sound   for   the 


19 


CREDIT  CURRENCY 


purchase  of  fish  and  sea  food  of  various  kinds. 
I  want  to  distribute  money,  because  these  peo- 
ple must  have  the  cash  in  their  hands  when  they 
come  in  with  the  boatloads  of  fish  or  oysters/ 
'Oh,  so  you  need  cash?'  'Yes.'  'Well,  I  can 
not  accommodate  you.'  'You  accommodated 
these  two  men.'  'Yes,  but  you  want  the  money/ 
'No,  I  don't  want  money,  not  real  money;  your 
notes  will  answer  my  purpose  perfectly/  'Well, 
I  have  no  notes  of  my  own  on  hand.'  'But,  Mr. 
Banker,  I  notice  by  your  published  statement 
that  you  have  a  right  to  issue  notes.  I  will  pay 
the  money  back  before  the  notes  come  back  to 
you  for  redemption/  'But,'  says  the  banker, 
'you  ask  me  for  something  rather  worse  than  if 
I  were  to  give  you  cash,  for  I  have  to  invest 
$11,000  of  my  money  in  United  States  bonds 
in  order  to  get  $10,000  of  my  notes  which  you 
want  to  borrow.     That  I  can  not  afford  to  do, 

20 


CREDIT  CURRENCY 


and  I  need  the  cash  as  reserve  for  the  loans  I 
just  now  made.' 

"So  you  see  by  a  system  as  costly  as  capital, 
the  benefits  of  credit,  as  operated  by  banks,  are 
positively  denied  in  a  large  number  of  cases  and 
handicapped  at  all  times  and  everywhere,  be- 
cause the  banker  has  no  way  of  extending  to  the 
borrower,  through  his  notes,  what  he  effectively 
extends  to  all  the  other  members  of  the  com- 
munity who  can  use  checks  and  drafts." 

Credit  bank  notes  are  also  of  great  service 
in  communities  where  there  is  a  scarcity  of  cap- 
ital. They  form  a  convenient  instrument  by 
means  of  which  the  capital  of  one  individual 
can  be  gathered  up  by  banks,  and  divided  and 
distributed  for  use  in  the  operations  of  produc- 
tion and  exchange.  If  a  depositor  places  $10,- 
000  in  gold  in  a  bank,  but  is  content  to  take  the 

21 


CREDIT  CURRENCY 

bank's  notes  in  payment  of  his  own  checks,  the 
bank  has,  substantially,  borrowed  $10,000  of  its 
depositor,  and  after  setting  aside  the  required 
reserve  against  this  liability,  it  may  safely  use 
the  balance  as  a  reserve  against  its  own  notes, 
thus  dividing  up  the  capital  of  its  depositor  and 
diffusing  its  usefulness  throughout  the  commu- 
nity. 

A  credit  currency  is  also  useful  in  communi- 
ties where  other  forms  of  money  are  scarce. 
The  comparatively  meagre  amount  of  gold  in 
circulation,  if  gathered  up  and  placed  in  the 
banks,  may  serve  as  a  safe  basis  for  multiplying 
the   circulating  medium   several   fold. 

Discount  Rates. — Were  the  banks  that  now 
rediscount  their  commercial  paper  permitted  to 
issue  a  credit  currency,  they  could  save  the 
heavy  discounts  (amounting  perhaps  to  an  aver- 
age  of   six   per   cent.)    they  now   pay   the   city 

22 


CREDIT  CURRENCY 


banks.  The  commercial  paper,  now  pledged  to 
the  city  bank  for  cash,  could  be  used  as  the  ba- 
sis for  bank  notes  by  the  banks  owning  it,  the 
only  conditions  being  the  usual  requirements  for 
reserves  and  a  redemption  fund.  This  would 
relieve  large  sections  of  the  country  from  the 
burden  of  high  discount  rates,  and  would  facili- 
tate the  production  and  marketing  of  staple 
products. 

Increase  of  Deposits. — If  banks  were  al- 
lowed to  issue  credit  notes,  they  could  largely 
increase  their  deposits,  since  they  could  make 
loans  in  many  cases  where  they  are  now  pre- 
vented from  doing  so.  And  the  borrower  would 
generally  become  a  depositor. 

Till  Money. — One  of  the  most  serviceable 
attributes  of  a  credit  bank  note  is  its  usefulness 
as  an  inexpensive  form  of  till  money — not  as  a 
reserve,  but  merely  the  cash  needed  from   day 

23 


CREDIT  CURRENCY 


to  day.  Gold,  silver  or  bond-secured  bank  notes, 
if  so  held,  all  represent  so  much  actual  money 
(for  even  the  bond-secured  bank  note  has  cost 
the  bank  one  hundred  cents  or  more  for  every 
dollar)  ;  but  a  credit  bank  note,  so  long  as  it  is 
held  by  the  bank,  costs  nothing,  beyond  the  ex- 
pense of  engraving  and  printing;  it  is  merely 
a  piece  of  engraved  paper,  and  no  more  valu- 
able than  a  blank  check.  When  paid  out  by  the 
bank,  in  exchange  for  commercial  paper,  or  to 
meet  a  check  drawn  on  the  bank,  it  then  be- 
comes valuable,  being  an  obligation  of  the  bank, 
for  whose  payment  a  reserve  must  be  set  aside. 
If  paid  out  for  commercial  paper,  the  bank 
holds  the  latter  as  an  offset  to  the  liability  it  has 
created  in  paying  out  the  note.  If  issued  in 
payment  of  a  check  drawn  on  the  bank,  there 
has  been  merely  a  conversion  of  a  deposit  liabil- 
ity into  a  bank-note  liability. 

24 


CREDIT  CURRENCY 


Prevention  of  Panics. — A  credit  currency 
would  tend  to  prevent  panics  by  keeping  the 
country  at  all  times  supplied  with  a  sound  in- 
strument for  effecting  the  exchange  of  products. 
It  would  also  prevent  that  inflation  of  credit 
and  undue  extension  of  enterprise  which  aggra- 
vate, if  they  do  not  aid  in  creating,  the  condi- 
tions out  of  which  panics  grow.  A  credit  cur- 
rency, available  for  use  at  all  times,  constantly 
subject  to  the  daily  test  of  redemption  in  gold, 
would  be  free  from  the  artificialities  that  inhere 
in  a  bond-secured  currency.  Such  a  credit  cur- 
rency tends  to  prevent  panics;  an  emergency 
currency  would  merely  seek  to  palliate  the  ill- 
effects  of  a  panic  after  it  occurs. 

Correcting  Redundancy. — At  present,  when 
the  supply  of  currency  proves  greater  than  the 
demand,  the  redundancy  can  be  corrected  only 
by  exporting  gold.     With  a  credit  currency,  the 

25 


CREDIT  CURRENCY 


excess  would  be  retired;  in  this  case  gold  would 
be  exported  only  to  pay  balances  accruing 
against  us  abroad,  never  to  reduce  the  redun- 
dancy in  the  currenc}'. 

OBJECTIONS     TO     A     BOND-SECURED 

CURRENCY. 

Lack  of  Elasticity. — Notes  secured  bv  a 
pledge  of  United  States  bonds,  or  by  other 
stocks  and  bonds,  can  never  have  the  same  de- 
gree of  elasticity  as  a  credit  currency.  As  a 
matter  of  fact,  the  national  bank  circulation 
based  upon  United  States  bonds  usually  con- 
tracts in  the  fall  when  money  is  most  needed  and 
expands  in  the  spring  and  early  summer  when 
the  demand  falls  off. 

Failure  to  Expand. — The  growth  of  a 
bond-secured  currency  can  not  keep  pace  with 
the  growth  of  business,  because  the  supply  of 

26 


CREDIT  CURRENCY 


bonds  is  not  determined  by  business  conditions, 
but  by  the  receipts  and  expenditures  of  the  Gov- 
ernment. If  the  supply  of  bonds  be  increased 
merely  to  afford  a  basis  for  bank  notes,  as  has 
been  done  in  the  United  States  within  recent 
years,  the  natural  influences  that  should  govern 
the  volume  of  bank  notes  are  supplanted  by  arti- 
ficial conditions — one  man  (the  Secretary  of  the 
Treasury)  assuming  to  determine  how  much  cur- 
rency the  country  shall  have. 

Its  Great  Cost. — A  bond-secured  currency 
is  the  most  expensive  circulating  medium  known 
— costing  even  more  than  gold  certificates.  For 
every  $100,000  of  national  bank  notes  issued  a 
bank  must  buy  bonds  costing,  with  the  premium, 
over  $100,000.  Such  a  policy  is  extravagant 
for  even  a  rich  communitv;  for  one  where  there 
is  a  scarcity  of  capital,  it  is  ruinous. 

27 


CREDIT  CURRENCY 


A  Tax  on  the  People. — With  abundant 
revenues  and  a  dwindling  debt,  a  bond-secured 
currency  can  be  maintained  only  by  creating 
debt  for  that  purpose.  Thus  the  people  are 
taxed  to  maintain  a  currency  that  is  unfitted  to 
the  needs  of  commerce,  and  that  has  been  aban- 
doned by  nearty  every  great  commercial  nation 
of  the  earth. 

The     Banks     Hampered. — By     compelling 

the  banks  to  buy  an  equal  amount  of  bonds  be- 
fore permitting  them  to  issue  notes  (the  actual 
cost  of  the  bonds  being  greater  than  the  notes 
that  may  be  issued),  the  ability  of  the  banks  to 
aid  local  production  and  trade  is  actually  less- 
ened. This  requirement  also  makes  it  impossible, 
in  many  cases,  for  the  banks  to  grant  credits  in 
the  form  wanted  by  perfectly  solvent  borrowers, 
as  explained  above. 

28 


CREDIT  CURRENCY 


Unjust  Discrimination. — Under  a  system 
of  bond-secured  notes,  there  is  an  unjust  dis- 
crimination against  the  small  borrower,  who  is 
prevented  from  having  the  use  of  an  inexpensive 
but  thoroughly  efficient  tool  of  exchange.  The 
Bank  of  France,  which  issues  a  credit  currency, 
and  is  probably  the  greatest  bank  in  the  world, 
makes  thousands  of  loans  of  less  than  $10.  It 
is  a  bank  of  the  small  trader  and  the  poor,  as 
well  as  of  the  large  dealer  and  the  rich. 

In  Favor  of  Large  Cities. — Again,  the 
bond-secured  circulation  works  against  the  coun- 
try districts,  where  interest  rates  are  high,  and 
in  favor  of  the  large  cities,  giving  them  the  ad- 
vantage of  still  lower  rates  of  interest. 

Not  Always  Safe. — The  notion  that  cur- 
rency secured  by  bonds  of  the  United  States  is 
always  safe  is  fallacious.     From  the  beginning 

29 


CREDIT  CURRENCY 


of  the  national  banking  system  till  1879  the  na- 
tional bank  notes  were  at  a  discount. 

Tends  to  Inflation. — There  being  no  true 
redemption  of  bond-secured  bank  notes,  a  con- 
stant tendency  toward  inflation  may  be  seen. 

Expels  Gold. — The  redundancy  in  the  cur- 
rency (in  the  face  of  which  the  expansion  of  a 
bond-secured  currency  goes  steadily  forward) 
can  be  cured  only  by  exporting  gold,  where  the 
notes  are  based  upon  bonds.  If  the  notes  were 
based  on  commercial  paper,  and  a  coin  reserve, 
the  redundancy  would  be  corrected  by  retiring 
and  cancelling  the  excess  of  notes.  When  gold 
was  exported,  in  payment  of  balances,  the  issue 
of  credit  notes  would  be  checked — the  supply 
of  reserves  being  decreased.  This  is  not  the  case 
with  bond-secured  notes,  which  go  on  increas- 
ing, although  the  gold  supply  may  be  diminish- 
ing. 

30 


CREDIT  CURRENCY 


A  Bond  Speculation. — The  issue  of  notes 
secured  by  bonds  is  mainly  a  speculation  in  Gov- 
ernment bonds,  and  the  notes  are  increased  or 
diminished  according  to  the  state  of  the  bond 
market,  without  regard  to  the  volume  of  busi- 
ness or  the  demand  for  currency. 

CONCLUSION. 

In  conclusion,  the  safety  of  a  credit  currency 
can  and  will  be  made  absolute.  The  safety-fund 
required  for  this  purpose  can  be  calculated  be- 
forehand with  mathematical  certainty,  and  the 
fund  may  be  set  aside  out  of  the  present  tax  on 
circulation,  which  is  abundant  for  that  purpose. 

Experience  has  proved  that  a  credit  currency 
is  safe  when  based  upon  commercial  paper,  with 
an  adequate  coin  reserve,  a  safety  fund,  and  an 
effective  system  of  daily  redemption.  The  notes 
of  the  Louisiana  banks,  of  the  State  Bank  of 

31 


CREDIT  CURRENCY 


Indiana  and  its  successor,  the  Bank  of  the  State 
of  Indiana,  as  well  as  those  of  the  New  England 
state  banks,  were  of  this  character.  Reference 
to  the  history  of  state  bank  notes  will  show  that 
a  bond-secured  currency  is  far  from  being  safe, 
and  that  practically  all  the  "red  dog"  and  "wild- 
cat" currency  was  secured  by  state  and  other 
bonds. 

A  credit  currency,  being  based  on  the  instru- 
ments arising  out  of  business  transactions  them- 
selves, adapts  itself  automatically  and  with  un- 
failing regularity  to  the  demands  of  production 
and  trade,  thus  becoming  a  powerful  weapon  to 
use  in  promoting  a  nation's  industrial  and  com- 
mercial activities. 

There  can  be  no  inflation  of  a  credit  cur- 
rency, for  the  reason  that  the  quantity  of  notes 
will  be  determined  by  the  convenience  of  the 
public,  and  with  a  proper  redemption  system,  the 

82 


CREDIT  CURRENCY 


motive  of  profit  which  impels  a  bank  to  put  its 
own  notes  in  circulation  will  also  impel  it  to  put 
the  notes  of  all  its  rivals  out  of  circulation.  The 
records  show  that  as  a  rule  the  volume  of  credit 
notes  issued  falls  far  short  of  the  limit  per- 
mitted by  law. 

The  demand  for  credit  circulating  instruments 
expresses  itself  through  the  banks,  just  as  the 
demand  for  meat  expresses  itself  through  the 
butcher  shops.  For  a  banker  to  refuse  a  cus- 
tomer bank  notes,  which  he  wants  and  can  use. 
and  offer  him  checks,  which  he  does  not  want 
and  can  not  use,  is  about  as  arbitrary  as  for  a 
butcher  to  offer  his  customer  pork  when  he  de- 
mands beef;  and  for  the  banker  to  dictate  to 
solvent  borrowers  how  many  notes  they  shall 
have  would  be  very  much  as  if  the  butcher 
should  assume  to  determine  how  much  meat  his 
customers  ought  to  buy. 

33 


389200 


CREDIT  CURRENCY 


The  increase  of  the  public  debt  under  the  Re- 
funding Act  of  March  14,  1900,  was  in  the 
direction  of  perpetuating  the  public  debt,  and 
with  it  the  bond-secured  national  bank  notes; 
the  issue  of  bonds  for  the  apparent  purpose  of 
providing  funds  for  construction  work  on  the 
Panama  Canal,  but  really  to  supply  a  basis  for 
more  bond-secured  bank  notes,  had  the  same 
end  in  view.  Both  these  measures  represent  a 
disposition  to  avoid  the  consideration  of  a  credit 
currency;  but  recent  events  indicate  that  this 
problem  must  be  dealt  with  soon,  if  not  imme- 
diately. 

Neither  a  credit  currency  nor  any  other  kind 
of  currency  can  be  regarded  as  a  panacea  for 
financial  ills.  But  notes  issued  upon  a  basis 
of  commercial  paper,  arising  out  of  business 
transactions,  with  a  sufficient  reserve  of  gold 
coin,  and  under  a  system  insuring  daily  redemp- 

34 


CREDIT  CURRENCY 


tion  through  the  exchanges,  are  sound  in  princi- 
ple, while  a  bond-secured  currency  violates  every 
principle  that  should  govern  in  the  provision  of 
a  paper  circulation.  We  shall  best  subserve  the 
interests  of  our  people  by  discarding  the  unsat- 
isfactory bond-secured  notes  and  supplying  gen- 
uine credit  bank  notes  to  take  their  place. 


35 


UNIVERSITY  OF  CALIFORNIA  AT  LOS  ANGELES 

THE  UNIVERSITY  LIBRARY 

This  book  is  DUE  on  the  last  date  stamped  below 


LIBRARY 


UC  SOUTHERN  REGIONAL  LIBRARY  FACILITY 


AA  000  559  583  o 


HG 

1867 

Y84o 


